DraftKings and FanDuel Scandal Is a Cautionary Startup Tale

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DraftKings and FanDuel Scandal Is a Cautionary Startup Tale

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You've seen the ads. The melodramatic plug featuring Edward Norton's voice over folks fixated on their phones during every mundane moment of their lives. And then there's the upbeat, everyday Joe-bro talking heads boasting about all the money they’ve won with their fantasy picks. You've seen the ads because they're everywhere.

DraftKings and FanDuel outspent the entire beer industry in the month leading up to and including the NFL’s opening season.

They’re on your phone. The websites you visit. Your podcasts. And, of course, on your TV, where these two 900-pound gorillas have taken up seemingly permanent residence. According to ad tracker iSpot.tv, DraftKings and FanDuel outspent the entire beer industry in the month leading up to and including the NFL’s opening season. At their peak, the two brands together aired almost as many ads (1,285) as there are minutes in a day (1,440). Between the two of them, they aired an ad on national television every ninety seconds for three weeks straight. To do that, iSpot.tv says, DraftKings spent $131.6 million on 41,064 ads, while FanDuel spent $75.4 million on 22,058 ads so far this year. That's up from 8,743 DraftKing ads and 14,017 FanDuel ads in 2014.

The ads brought the two companies a lot of attention. And now they're getting attention of an entirely different sort. Earlier this week, TheNew York Times reported that a DraftKings employee inadvertently released company data on player lineups before the third week of NFL games. That same week, he won $350,000 at FanDuel. Company employees aren’t allowed to place bets on their own sites, but it seems plausible that the employee, a midlevel content manager, could have had an advantage because of where he worked.

The scandal has finally brought scrutiny to a young industry awash in money and attention—neither of which it quite knows how to deal with. After several rounds of funding, DraftKings and FanDuel are now full-fledged “unicorns,” the startup world’s lingo for companies valued at more than a billion dollars. And their collective story is much like the story of every other unicorn fixated on rapid growth above all, regardless of the cost. It’s a trajectory that's become familiar thanks to the likes of Uber, Airbnb, and others: The more obsessed you become with growth, the more likely you are to hurtle forward, even if you’re operating in the gray areas with the potential for abuse.

Showered With Millions

For the daily fantasy sports industry, the saga began in 2006, when lawmakers passed the Unlawful Internet Gambling Enforcement Act. Federal law prohibited Internet gambling—so online poker, online bingo, online casinos, and the like, became illegal—and major sports leagues lobbied for the ban, too. But at the last minute, a carve-out for fantasy sports was added, with approval from professional leagues. Fantasy sports, the leagues reasoned, boost fan interest, which is good for business. It wasn't a hard sell, since fantasy sports at the time seemed innocuous, especially compared to the traditional sports-betting world of bookies and beating the spread.

Back then, most people played by gathering a few like-minded friends. Each participant assembled an imaginary lineup of real players. As the season progressed, your fantasy team accumulated points based on your players’ performances in real life. At the end of the season, the person whose imaginary team, roughly speaking, scored the most points won the fantasy league.

About a year after the law passed, daily fantasy sports emerged—with a dramatically different concept. Everything moved online. You bought into games for a fee of as little as $5 or as much as $100, and created multiple lineups. You could, as the name suggests, play daily. And you could win large sums of money. “It’s fundamentally different now. I can have software, and I can make, maybe 200 lineups—and I can enter them all,” says Ed Miller, a poker strategy author who now regularly plays daily fantasy sports.

Today, DraftKings has a total haul of $426 million in financing, while FanDuel has $363 million.

In the beginning, daily fantasy games languished in obscurity. “They landed with something of a thud, and you didn’t see much activity in the space,” says Chris Grove, an industry expert and editor of legalsportsreport.com. Then FanDuel launched in 2009. DraftKings followed three years later. Many smaller outfits had also launched. The industry started gaining traction, especially when the two biggest players started raking in millions in funding.

Today, DraftKings has a total haul of $426 million in financing, while FanDuel has $363 million. Google Capital, Time Warner Investments, NBC Sports Ventures and Comcast Ventures have invested in FanDuel, and the NBA has an equity stake. It has partnered with 16 NFL teams and 14 NBA teams. Major League Baseball, meanwhile, invested an undisclosed sum in DraftKings, and the startup also has partnerships with twelve NFL teams, eight NBA teams, seven NHL teams, and twenty-five MLB teams. It has relationships with the digital media company Bleacher Report, two sports promotional bodies (NASCAR and UFC), and two major sports venues (Madison Square Garden and Staples Center), not to mention a host of venture capital firms. For its ad deals, DraftKings teamed up with Fox’s Sports unit and ESPN.

So yeah—it’s no surprise that you’ve seen or heard an ad or two from these companies.

One sports betting insider told me the companies are trying to reach critical mass. They're trying to turn a corner, he said.

An Anxiety in the Industry

Now the industry may be headed toward a wall. New York Attorney General Eric Schneiderman launched an inquiry Tuesday night to look into any possible advantages DraftKings and FanDuel employees might have gained by using company data to win contests offered by the other. ESPN pulled co-branded DraftKings segments. On Thursday, a class-action suit was filed in federal court against both startups. The specter of a crackdown looms.

To be sure, the daily fantasy sports insiders I've spoken to say there’s no real way to prove that even if the DraftKings employee had data on how many people chose each athlete on DraftKings for an upcoming contest, it necessarily follows that he cheated on FanDuel. In the format of daily fantasy sports, says Miller, where players can only contribute small amounts of money to buy into games with a massive number of other contestants, inside information might gain you an edge but not an assured win. What if he was just really good at the game?

Daily fantasy sports are hard to win, in other words, but that doesn't make them a scam.

Yes, the prizes in daily fantasy games often go disproportionately to the top players. And it’s true, the payouts can sometimes be a lot. In fact, a Bloomberg story from earlier this year described the tactics from Saahil Sud, a top-ranked player, who claimed to have won more than $2 million from playing daily fantasy sports this year. But Sud also admitted to spending between eight and 15 hours a day working on his lineups, and having about $140,000 in play on any given day. Another strategy he employs: using custom-built predictive models and computer software to crunch the numbers and increase his odds of winning. But, just like in plain old gambling, where these kinds of hacks are also common, Sud's mathematical methods aren't a silver bullet for winning games.

Daily fantasy sports are hard to win, in other words, but that doesn't make them a scam. "This is about statistics and probability and trend analysis and patterns," says Seth Young, chief operating officer of Star Fantasy Leagues, a smaller daily fantasy sports site. "But it's also about feel*—*who you want to pick, who you want to root for. You can play the game effectively if you're just a huge fan, and you know everything there is to know about the sport."

What seems hard to argue with is that daily fantasy sports really are a lot like gambling—and on this point, most insiders agree. It’s just happenstance and the youth of the industry that’s allowed it to escape regulation all these years, they say.

Reached by email, FanDuel directed WIRED to its latest company statement. DraftKings did the same. In response to the scandal, both companies have permanently banned their employees from playing daily fantasy games for money, on any site. Both have also banned employees from any other daily fantasy sports sites from participating on their platforms. FanDuel asked a former federal judge to evaluate its internal controls and practices, and contracted a law firm to give the team ongoing advice internally. DraftKings engaged a legal team to conduct an internal investigation too, and it says it will release its findings once the probe is complete.

While the results of these investigations are still up in the air, insiders differ on whether the industry can self-regulate. Some say yes, while others aren’t so sure, pointing to other cases, especially in online poker, where companies have been accused of stealing millions of dollars of poker players’ money. Many just hope the games won't be made completely illegal, arguing that the wholesale ban on online gambling was an arbitrary decision. But what has everyone most worried is that new rules will be made by outsiders who don’t really understand the industry at all.

"Regulation is inevitable, in my opinion,” says Young. “Moving forward, I just think it’s important that whoever is going to be doing this is educated about the businesses.”